You probably know that chip cards offer much better fraud protection and help prevent chargebacks than the (now) antiquated magnetic stripe cards, but what are the specific differences between the two? And how does that affect the decisions your business should make?
These are important questions to have answers to when designing your payment processing solutions model, and knowing the differences will help you make better business decisions.
Let’s dig in.
Magnetic stripe cards are just classic credit cards (also known as swipe cards), the ones we’re all familiar with. The actual stripe is on the backside of the card, and it uses modified iron-based magnetic particles to communicate data between the strip and the receiving credit card terminal.
Magnetic stripe cards simply serve as static storage devices to be read by the terminal. The terminal then performs a card swipe, PIN encryption, and signature capture function.
The actual transaction flow looks like this:
Simple enough, right?
The problem is, there’s no system in place to individualize these magnetic stripe transactions. They’re all bulked together, meaning if someone can steal your credit card information during a transaction, then they can use that for future transactions.
That’s been a big issue, but that’s exactly what chip cards solved.
Excluding the way we interact with a terminal, the chip cards act and look just like magnetic stripe cards, but behind the scenes it is much more intricate and protective.
They’re sometimes referred to as EMV chip cards as well, with EMV denoting the developers of the chip: Europay, Mastercard, and Visa.
EMV chip cards use an actual computer chip placed on the top part of a credit card to communicate with terminals. These chips allow a much more intricate and secure transaction process to occur.
Let’s look at a typical chip card flow:
We won’t go into detail on each of those steps, but what you need to know is that chip cards do a much better job at protecting user data by use of individualized “tokens”.
Each transaction is a unique code that cannot be used again, so even if a fraudster captures someone’s credit card data at a terminal, they couldn’t use it for future transactions. Each swipe is only good for one transaction.
EMV also enables greater confidence for offline transactions, as details can be verified from the Chip embedded on the card without contacting the issuer.
This also makes it easier for credit card algorithms to spot and identify fraudulent activity.
If you’re thinking being EMV compliant and supporting chips is a no brainer, then you would be correct, and it’s more important now than ever to upgrade your business to be EMV compliant.
EMV-certified terminals start as low as $200 as discussed in this article, and depending on your setup, your existing hardware can become EMV-certified with a custom integration.
If you have better transaction security, you’ll deal with less fraud and fewer chargebacks. A few years ago, credit card network rules were updated to place more financial risk on merchants without chip cards for lost or stolen transactions. If you’re late to switching to EMV, you’re at risk of seeing chargebacks continue to increase and will lose cases at a much higher rate.
Don’t underestimate how quickly those costs can add up!
Switching to chip cards is more than just saving money and reducing chargebacks, it’s about protecting your customers. As mentioned, EMV equipped transactions are unique, ensuring that charges are never duplicated or faked. Plus, less fraud means fewer headaches from disputes and better service for your customers!
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